In a sudden turn of events, the world’s largest insurer American International Group (AIG) faced collapse if not for the US$85 billion loan from the US government. Who would have expected such a corporate giant to be fighting for its life?

Out of the top-five investment banks in the US, two have been taken over, one went belly up, while the remaining two face headwinds in this financial storm.
After the US government took over Fannie Mae and Freddie Mac, there has been nothing but bad news all the way for the financial markets.

Out of the blue on 18 September, a stock market miracle occurred when the Shanghai and Hong Kong markets staged an incredible rebound. On that day, the Shanghai index fell to 1,800 points while the Hang Seng Index threatened to break 16,000 only for both to stage a very strong rebound – a V-shaped rebound.

After the markets closed, the Chinese government announced measures that will help boost the market. Firstly, the government announced that only the seller need pay for the stamp duty for buying shares as opposed to earlier practices where both buyer and seller had to fork out money for the stamp duty. Secondly and most importantly, the Chinese government intervened by buying up shares of Bank of China, Industrial & Commercial Bank of China and China Construction Bank. Lastly, the government also encouraged companies to buy back shares from the open market.

The strong rebound just before the announcement was made means that the news was probably leaked. Following the Chinese government’s move, the US government, too, sent markets skyrocketing by announcing a US$500 billion injection of cash to buy up troubled assets, possibly including CDOs.

Has the bear market ended? Is the rally a bear rally in the second phase of the bear market?

It certainly does not look like the bear market has ended although the Chinese government seems determined to lend its support to the stock market. The Shanghai index, at 1,800 points, is considered a very attractive entry point after falling more than 70% from its high of 6,000 points. I believe that the Chinese authorities view this level as its bottomline and are unlikely to allow the index to fall below this level.

It is indeed very tough to predict the trough so let us not get carried away.

Although the influence of the Chinese government is huge, let us not forget that there are still clouds of uncertainty in the US. Although the US government has decided to inject US$500 billion, how is AIG going to dispose of its assets?

Nevertheless, it is time for everybody to be more optimistic about the future but I do not encourage investors to jump into the market right now. We can buy into the market quite gradually while taking note of developments. There is no need to investors to sell on rebound because you might end up regretting. Bear in mind that the Chinese government is buying into shares of three banks and it is unlikely to benefit the entire market, including S-chips listed here on the Singapore Exchange.